ATAD 3 amendments: Are you ready for the changes?

Luxembourg

Skip to content

Background

On 12 May 2022, the reporter of the Committee on Economic and Monetary Affairs of the European Parliament (ECON) published its draft report (the Draft Report) with proposed amendments to the initial proposal (published in December 2021) for a Council directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU (ATAD III or the ATAD III Proposal).

We refer to our previous article on the ATAD III Proposal for further background.

The Draft Report has three main objectives:

  1. the safeguard of taxpayers’ rights, in particular in relation to privacy and data protection,

  2. the protection of a level playing field for EU companies while ensuring fair taxation; and

  3. to minimize any related administrative burden and costs.

This Draft Report is another preliminary step in the legislative process that should lead to the final version of ATAD III. Even though none of the proposed amendments listed below are definitive (i.e., the vote of the Draft Report is scheduled in committee on 17 November 2022), they are interesting to take into consideration as they seem to indicate a move towards a more realistic approach to minimum substance and therefore, ultimately, a more likely adoption of the proposed Directive which so far has been hailed as difficult to implement and apply, raising doubts on whether the Directive would eventually be adopted.

Most notably, the proposed amendments also provide for a delayed entry into force as from 1 January 2025, with a corresponding delayed application of the 2 year “look-back” period (as from 1 January 2023) applicable to the gateways. This will thus give taxpayers more time to anticipate the consequences of ATAD III.

Key highlights

The Draft Report validates a large part of the ATAD III Proposal, but it also calls on the European Commission to alter its proposal on several points, in particular the following (main changes in bold):

Topic

Current ATAD III Proposal

Draft Report

 

Gateways

(Article 6 §1)

 

The cumulative conditions to be fulfilled to fall within the scope of ATAD III are:

  • More than 75% of the revenues accruing to the undertaking in the preceding two tax years is relevant income; and
  • More than 60% of the book value of the undertaking’s [relevant assets] was located outside the Member State of the undertaking in the preceding two tax years; or  At least 60% of the undertaking’s relevant income is earned or paid out via cross-border transactions; and
  • In the preceding two tax years, the undertaking outsourced the administration of day-to-day operations and the decision- making on significant functions.
 

 

The cumulative conditions to be fulfilled to fall within the scope of ATAD III are:

  • More than 80 % of the revenues accruing to the undertaking in the preceding two tax years is relevant income in accordance with Article 4; and
  • More than 55 % of the book value of the undertaking’s [relevant assets] was located outside the Member State of the undertaking in the preceding two tax years; or  More than 65 % of the undertaking’s relevant income is earned or paid out via cross-border transactions; and
  • In the preceding two tax years, the undertaking outsourced the administration of day-to-day operations and the decision- making on significant functions to an entity that is not an associated enterprise within the same jurisdiction as the reporting undertaking.

 

 

Undertakings excluded from ATAD III

(Article 6 § 2)

 

 

 

N/A

 

Addition of an exemption of entities owned by regulated financial undertakings and which have as their objective the holding of assets or the investment of funds.

 

 

Undertakings with at least five own full-time equivalent employees or members of staff exclusively carrying out the activities generating the relevant income

 

Undertakings with at least five own full-time equivalent employees or members of staff exclusively carrying out the activities generating the relevant income and working in the jurisdiction where the undertaking is resident for tax purposes.

 

 

Substance indicators

(Article 7)

 

 

One of the directors of the undertaking (…) (3) actively and independently use the authorisation referred to in point (2) on a regular basis (…).

 

 

This condition has been removed.

 

Tax consequences

(Article 12)

 

The Member State where the undertaking is resident for tax purposes should:

  • Deny issuing a certificate of tax residence; or
  • Be able to issue such certificate while indicating, by means of a warning, that it should not be used by the undertaking to obtain tax benefits (mainly from double tax treaties, the Parent-Subsidiaries Directive and the Interest and Royalty Directive).

 

The Member State where the undertaking is resident for tax purposes should deny issuing a certificate of tax residence.

Once the tax residence certificate is denied, the Member State issues an official statement, duly justifying such decision and prescribing that the undertaking is not entitled to the tax benefits (mainly from double tax treaties, the Parent-Subsidiaries Directive and the Interest and Royalty Directive).

 

 

Administrative pecuniary sanction

(Article 14)

 

Member States shall ensure that those penalties include an administrative pecuniary sanction of at least 5% of the undertaking’s turnover in the relevant tax year.

 

 

Member States shall ensure that those penalties include an administrative pecuniary sanction of at least 2,5 % of the undertaking’s turnover in the relevant tax year.

Audit from tax authorities

(Article 15)

Where the competent authority of one Member State has reason to believe that an undertaking which is resident for tax purposes in another Member State has not met its obligations under ATAD III, the former Member State may request the competent authority of the latter to conduct a tax audit of the undertaking.

 

Where the competent authority of one Member State has reason to believe that an undertaking which is resident for tax purposes in another Member State has not met its obligations under ATAD III, the former Member State may request the competent authority of the latter to conduct a joint tax audit of the undertaking.

 

 

Entry into force of ATAD III

(Article 18 § 1)

 

 

Members States shall apply the ATAD III provisions from 1 January 2024.

 

Members States shall apply the ATAD III provisions from 1 January 2025.

 

Look back period for gateways assessment

 

 

Started on 1 January 2022.

 

Should start on 1 January 2023.

 

More details may be found here.

Comment

Different industry associations have expressed deep concern on the obstacles that the ATAD III Proposal generates to investment channelling within the EU, as well as the disadvantages (in terms of competitiveness) it creates when compared with non-EU jurisdictions.

While some of the changes proposed in the Draft Report (even though not definitive at this stage) are welcome, it is still expected that further key clarifications will be provided on certain notions relevant for the interpretation of the of the ATAD III Proposal, which will be amended before being adopted.

Our tax team remains available for any advice or assistance you may require.